Aug. 11 (Bloomberg) -- The U.S. government posted a smaller
budget deficit in July compared with the same month last year,
helped by a gain in corporate tax revenue as the economy
recovered from the worst recession since the 1930s.

The excess of spending over revenue totaled $165 billion
last month following a shortfall of $180.7 billion in July 2009,
according to a Treasury Department report issued today in
Washington. The gap for the fiscal year that started in October
was $1.17 trillion compared with $1.27 trillion last year at the
same time.

While economic growth since the middle of 2009 has helped
bring in more tax revenue for the Treasury, the deficit is
forecast to approach a record $1.5 trillion this year. The need
to keep the budget shortfall from growing and a slowing economy
plagued by joblessness close to 10 percent are challenges for
the Obama administration.

“ We’re seeing pretty good profits now, it’s looking a lot
more solid,” said David Wyss, chief economist at Standard &
Poor’s in New York. “But, you’ve still got a $1 trillion
deficit.”

Another report today showed the trade balance deteriorated
in June as imports grew and exports dropped. The gap
unexpectedly swelled by a record $7.9 billion to $49.9 billion,
the Commerce Department reported.

Shares Drop

Stocks slumped on concern the global recovery was starting
to weaken. The S&P 500 Index fell 2.5 percent to 1,093.23 at
2:26 p.m. in New York. Treasury securities climbed, sending the
yield on the two-year note down to an all-time low.

The government’s budget deficit for July compares with a
forecast of $169 based on the median of 35 estimates in a
Bloomberg News survey of economists. Their projections ranged
from gaps of $149.1 billion to $181 billion.

The economy began to recover in the second half of 2009
from the recession that started in December 2007. A limited
recovery in the labor market after the loss of 8.4 million jobs
during the recession is restraining consumer spending and
growth.

The world’s largest economy slowed to a 2.4 percent annual
rate in the second quarter from 3.7 percent in the first three
months of the year, according to Commerce Department statistics.

Fed Action

Federal Reserve policy makers yesterday said the recovery
slowed more than they projected, prompting the central bank to
take additional steps to support the economy.

The U.S. is financing a deficit the Obama administration
projected will reach a record $1.47 trillion this year, even as
yields on Treasuries have reached the lowest during an economic
expansion since the Eisenhower administration in the 1950s.

The non-partisan Congressional Budget Office, in a report
issued Aug. 6, projected a narrowing of the July budget deficit
to $169 billion. In its estimate, the CBO said “for the sixth
consecutive month, net corporate income taxes were higher than
those in the same month in fiscal year 2009.” The CBO
attributed it to “stronger corporate profits in 2010.”

In today’s report, the Treasury said revenue and other
income climbed 2.7 percent to $155.5 billion in July from the
same month last year. Corporate tax receipts increased 34
percent for the fiscal year to date to $139.7 billion.
Individual income tax collections fell 4.1 percent over the same
time period to $719.5 billion.

Less Spending

Spending for the entire government for July dropped 3.5
percent from the same month a year earlier to $320.6 billion.
Spending by the Defense Department rose to $557 billion for the
fiscal year to date. Outlays by the Social Security
Administration climbed to $631.2 billion. The Department of
Health and Human Services, which administers the Medicare and
Medicaid programs, increased its spending to $723.4 billion.

Earlier this month, the Treasury lowered its estimate for
government borrowing from July through September, reflecting a
reduction in federal spending. Borrowing will total a net $350
billion in the current quarter, compared with an estimate three
months ago of $376 billion, the Treasury announced Aug. 2. It
also projected borrowing of $380 billion in the three months to
Dec. 31.

Peter Orszag, during his last speech as White House budget
director on July 28, said it would be “foolish” to try to
slash the deficit before the economy recovery gains strength.

Stimulus Spending

Orszag, who left his post at the end of last month, said
the measures taken in response to the worst recession in more
than 70 years, including the $862 billion stimulus, helped boost
U.S. economic growth and stemmed job losses.

While the government must address the nation’s long-term
debt, “it would be foolish to dramatically reduce the deficit
immediately” because that would choke off the recovery, Orszag
said in Washington.

The economy, jobs and the budget deficit are likely to be
top issues in November elections that will decide control of
Congress. Heading into the campaign season, the Obama
administration is facing public pessimism about the direction of
the economy.

More than seven in 10 Americans say the economy is still
mired in recession, and people are conflicted over how to
balance concerns over joblessness and the federal budget
deficit, according to a Bloomberg National Poll.

Americans are torn about whether the federal government
should focus on curbing spending or creating jobs, the poll
conducted July 9-12 showed. Seven of 10 Americans say reducing
unemployment is the priority. At the same time, the public is
skeptical of the President Barack Obama’s stimulus program and
wary of more spending, with more than half saying the deficit is
“dangerously out of control.”

To contact the reporter on this story:
Vincent Del Giudice in Washington at
vdelgiudicebloomberg.net